VAT Flat Rate Scheme: the limited cost trader test
Last updated: October 20, 2026
By the Glasscubes editorial team
Short answer: a business on the VAT Flat Rate Scheme is a limited cost trader, and must use the 16.5% flat rate instead of its sector rate, if its VAT-inclusive spending on relevant goods in an accounting period is less than 2% of its flat-rate turnover, or more than 2% but less than £1,000 a year (£250 a quarter). The test is applied each period, so a business can move between 16.5% and its sector rate. The rule has applied since 1 April 2017 (VAT Notice 733).
The test
| Spend on relevant goods in the period (VAT-inclusive) | Rate to use |
|---|---|
| Less than 2% of flat-rate turnover | 16.5% |
| 2% or more, but less than £1,000 a year (£250 a quarter) | 16.5% |
| 2% or more, and £1,000 a year or more | The business’s sector rate |
What counts as relevant goods
Goods used exclusively for the business. HMRC’s examples include stationery and office supplies, gas and electricity, stock for a shop, cleaning products, and hair products used to provide hairdressing.
What does not count
- Capital expenditure goods, of any value.
- Food or drink for the owner or staff.
- Vehicle costs, including fuel, unless the business is in the transport sector and uses its own or a leased vehicle.
- Goods for resale, leasing, letting or hiring out, unless that is the main business activity.
- Any services — for example accountancy fees or rent.
Watch out for
- Service businesses with few physical purchases, such as consultants and contractors, usually fail the test and land on 16.5%.
- Buying goods only to clear the 2% threshold is something HMRC specifically looks at; the goods have to be used exclusively for the business.
Sources
Checked against the source above on 16 October 2026. General information, not advice on a particular business’s position.
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